ConocoPhillips vs. Occidental Petroleum: Why Oxy Could Be the Better Play

A couple days ago, fellow Fool Rupert Hargreaves wrote a thought-provoking article comparing ConocoPhillips (NYSE: COP) to Occidental Petroleum (NYSE: OXY) in terms of both income and growth. He concluded that Occidental Petroleum was roughly equal to ConocoPhillips in terms of growth. However, when looking at income potential, Hargreaves cited Conoco's higher dividend yield and slightly lower price-to-earnings valuation, and concluded that Conoco was the all around better choice.

The choice between ConocoPhillips and Occidental is indeed a tough one. In fact, I really like both, but at this time, I actually think that Occidental is the better choice, and in this article I will explain why. For the sake of consistency, I will use Rupert's criteria of income and growth to compare the two.

Plans for growthIn his article, Rupert explained ConocoPhillips' production growth prospects quite well: 3% to 5% compound annual production growth until 2017, driven by higher-margin production, with the 'key' to Conoco's growth coming from the Eagle Ford shale. In addition, Conoco has some other high-margin growth projects under way in the oil sands, Malaysia, Australia, the UK, and the Norwegian North Sea.

But what about Occidental? The article was correct in that the spinoff should unlock some interesting growth potential, but I don't believe that his article fully appreciated Occidental's post-split growth opportunities.

After Occidental spins off its California and Bakken assets and sells much of its Middle East and North African assets, what we will have left will be a Texas-centered business. Yes, Occidental had trouble shale drilling in California, but the post-spin Occidental will finally be able to concentrate on the Permian Basin, where the company has a massive 2 million acre position, much of it over the completely undeveloped Wolfcamp Shale play. For the leaner company that Occidental will be, development of horizontal drilling in the Wolfcamp shale could later lead to eye-opening production growth.

IncomeDividends are important these days, and it's always good to look at the dividends of comparable companies before making an investment decision. Yes, ConocoPhillips has a yield of over 4% while Occidental yields only 3%. Yes, I do think Conoco is an excellent dividend play with great underlying, cash-positive assets in Alaska and Bayu Undan.

But let's take a closer look at what a post-split Occidental might have in store. Occidental holds perhaps the most profitable oil position in North America: 2 million acres of CO2 injection oilfields in the Permian Basin. Right now, the immense profitability of this acreage is masked by Occidental's other acreage around the world. But not so with post-split Occidental, where Permian CO2 operations will be the company's flagship business unit. When all other assets are shed, and all the share buybacks completed, Occidental's West Texas CO2 oil may give us a very juicy dividend yield.

Unlocking valueThe most important reason that I would pick Occidental over ConocoPhillips right now is that Occidental is unlocking value through a breakup. Breakups work -- just ask ConocoPhillips, which went from about $50 to nearly $75 since its breakup from Phillips 66 in 2012. Immediately after the breakup, Conoco yielded 5%. I believe we might get a similar yield out of Occidental after its breakup.

Even more important than the dividend is just how much Occidental's assets would be worth piecemeal. Bank of America analyst Doug Leggate thinks the company could be worth $150 per share in a split, provided that the split also separate Occidental's Middle East and North Africa assets from its Americas assets. Currently, shares of Occidental sit at about $95. This gives us over 50% upside potential.

Bottom lineA choice between ConocoPhillips and Occidental is a tough one. Personally, I like both, and I have been long Conoco since before the split, but if I had to buy one today, it would be Occidental. The tremendous potential for horizontal drilling development and the high-margin profitability of Permian CO2-injection oil operations could soon give Occidental an industry-leading dividend and some solid growth above what ConocoPhillips can offer.

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